News

POV: Amazon Fire Phone

Mindshare Point of View

Background

Amazon has announced that it is to launch a smartphone to run alongside its existing hardware, the Kindle e-reader and the Kindle Fire tablet. The Fire Phone appears to be designed to drive increased revenues for Amazon both by locking people in to its Prime service, but also by making increased margins on the product itself, a change of strategy for Amazon, which has often sold its own-brand products at close to cost.

Details/Implications

The Fire Phone was touted by Amazon as a step-change in smartphones due to its ground-breaking technological features: Dynamic Perspective gives objects on the screen a near-3D appearance whilst an image recognition function called Firefly allows a user to capture an image of something which is then added automatically to the shopping cart on Amazon. The latter appears to be tied to an Amazon acquisition made in 2009.

The phone is initially only to be released in the US, exclusively on AT&T, with 32GB & 64GB models available on 2 year contracts for $199 & $299 respectively. Whilst not particularly expensive, this puts the Fire in the same sort of price category as Samsung’s Galaxy S5 and lower-end versions of Apple’s iPhone 5S (though Amazon is offering various initial freebies to boost the value). In comparison, the Kindle Fire retails for something like 1/3 the price of an iPad mini.

This is a major change in strategy as Amazon has tended to almost give hardware away, and then make up the difference with increased sales of associated media. They have been quite open that they want to get people to trial Amazon Prime, which results in customers spending much more on associated goods, but asking someone to pay almost the same as an iPhone for the privilege of being able to buy stuff from Amazon could be a stretch.

Analysts have suggested that this product is aimed at Amazon’s most core-customers; selling to this niche audience could, due to the higher margins on the Fire Phone, generate massive revenues. But going up against the likes of Lenovo, Samsung, Google and Apple is a very big bet. Facebook tried something similar when it launched Facebook Home/HTC First but, as Ben Thompson pointed outthat proved that just because people love Facebook didn’t mean they wanted Facebook to dominate their phone, and by extension, their lives”. Amazon could soon find out the same thing.

Summary
Amazon has built a huge business, but almost no actual profits, by consistently ignoring margins to focus on growth. The launch of the Fire Phone suggests that it is changing that strategy in so much as it could generate massive margins and growth, if it locks people in to the Amazon ecosystem.  However, Amazon face massive challenges to differentiate from the high-end sophistication of Apple and the ruthless aggression of the major Android manufacturers, essential if it wants to achieve real scale.